What it means for home sellers and buyers
Zillow jumped into the direct home buying space in 2018. The company joined a number of ibuying startups like Opendoor and Offerpad. But recently, the company announced it would shutter its Zillow Offers direct home buying division.
Buying and selling homes directly certainly seemed like a smart play for the company. Zillow has strong awareness among consumers, and a trove of homes sales data gleaned from public records, Multiple Listing Services (MLSs) and user-submitted information. These data are what make up the company’s ubiquitous Zestimates, its proprietary automated home valuation model. We can only assume these Zestimates were the primary data point being used when the company made an offer to purchase a home.
Sounds like a slam dunk for Zillow. So what went wrong? A couple of assumptions:
Zestimates proved to be less accurate than the company had hoped
Accuracy has always been an issue with Zillow’s Zestimates (and AVMs overall), as we’ve written about here and here. As a result, the company overpaid for many of the homes they purchased, then wound up selling for a loss. A win for sellers, perhaps, (and maybe the next buyer), but it’s certainly no way to run a business.
The market moved faster than the data (especially at the local level)
Once a home goes under contract, it can be 30 days, 45 days or longer (or shorter) before a home officially closes. It may then take even more time for that information to be recorded in the public records. Based on those timeframes, Zillow’s sales data could be 2 or 3 or 4 months out of date. It doesn’t seem like a big deal until you experience a housing market like the one we’ve been living with over the past year or so.
The answer? You have to have boots on the ground. Knowledgeable agents that know the market, because they’re experiencing it firsthand.
A computer model will never know, for instance, that the home that recently went under contract had 20 competing offers on it. It won’t know that the home appraised for $20,000 less than the sale price and the buyer paid the difference out of pocket. That’s a big part of what got Zillow into trouble. As a result, they wound up paying over market value in an overheated market. Had they had a team of agents or appraisers in every market advising them as to what was happening on the ground, they still may have shut down their iBuying division. But they probably would have saved a lot more money in the process.
Ask any real estate agent or appraiser and they’ll tell you the same thing. Automated valuations and Zestimates are good tools, but they’re just one piece of the puzzle. In short, a computer can tell you the what (the sales prices of various homes in a neighborhood, for example), but it can’t yet give you the why (one home with more upgrades than the other, for instance, or a white hot market where buyers are foregoing appraisals, inspections and more).
To get that type of evolving, in-market data, it takes a knowledgeable human. Preferably one with a real estate or appraiser’s license.